TYPES OF LIFE INSURANCE
Life insurance is divided into two categories: term and permanent. Term life insurance has a specified coverage period (term), but can usually be renewed or converted into a permanent policy at the end of a term. Premiums are generally affordable initially, but can increase substantially when renewed.
Permanent life insurance is life-long coverage that generally also includes a cash value savings component. There are many types of permanent life insurance, including whole, universal and variable. This type of coverage has higher premiums, but offers more long-term value.
Employer-sponsored coverage can be offered in a variety of ways. Employers may offer a term policy, permanent coverage or both. Cost-sharing also varies, as some employers cover the full cost, some require employees to pay the full premium and others split the cost with employees.
A common scenario is an employer offering a group-term policy at no cost to the employee, with a coverage amount that is a multiple of annual salary (usually one to five times annual pay). Group-term policies often end when an employee leaves the organization (or dies), but employees may be able to convert it to a permanent policy or renew it upon leaving. This is generally an affordable plan for employers to offer, though it does not offer as much long-term value to employees as a permanent plan.
Many employers who offer such a group-term policy also offer additional voluntary coverage options, in which the employee pays the full cost but still realizes the benefit of group rates and payroll deductions. Additional coverages offered may include:
- Spouse/dependent life insurance (group-term policies only cover the employee)
- Supplemental term life insurance (to elect a higher amount than the employer offers)
- Supplemental permanent coverage (a whole, universal or variable life policy in addition to the term policy)
- Accidental death & dismemberment (AD&D) coverage
Group-term life insurance is a common employer-sponsored life insurance offering. This article discusses the basics of this coverage, plus important rules and considerations.
The Basics Group
Group-term life insurance is coverage that employers offer to employees only. Coverage may be employer-or employee-paid. Often, employers offer a specified benefit (flat fee or percentage of salary) that is cost-free for employees, then offer the option for employees to purchase additional coverage.
Because spouses and dependents are not covered under this type of plan, some employers also offer a separate voluntary plan to cover these individuals if employees choose.
This coverage is generally very affordable for employers, because the group plan spreads the risk over many people so premiums tend to be low. Plus, if you take the time to educate employees about the importance of life insurance, offering this coverage can increase employees’ appreciation of their benefits package.
Group-term life insurance is also advantageous for employees. Employees get coverage that is either employer-paid or at least cheaper than a policy purchased in the individual coverage market. Another big advantage for employees is that most group-term plans do not require health assessments.
Employees purchasing coverage individually often face premiums contingent on the results of a medical exam –or may even be denied coverage on that basis.
Group-term life insurance coverage is deductible by employers as a business expense, unless the employer is a beneficiary of the policy. Employees may also exclude coverage up to $50,000 from their income. Coverage above that amount must be included in an employee’s income and is subject to social security and Medicare taxes. There are some exceptions and special considerations to this rule; see the IRS website for more details:www.irs.gov/pub/irs-pdf/p15b.pdf.
The plan may not discriminate in favor of key employees regarding their eligibility to participate or the amount of benefits available to them. If the plan does discriminate in favor of key employees, those employees are not able to exclude their first $50,000 in coverage from gross income.
In order to qualify as a group-term life insurance plan under IRS rules, the plan must meet all of the following conditions:
- The plan must provide a general death benefit that is excludable from the gross income of the beneficiary when paid.
- Coverage must be offered either to all employees or a smaller group of employees, only if group membership is determined solely on the basis of:
- Marital status,
- Union membership,
- Job duties,
- Length of service,
- Participation in an employer’s pension, profit-sharing, stock bonus or accident and health plan, or
- Other employment-related factors
- The policy must be carried directly or indirectly by the employer.
- The amount of coverage provided must be computed under a formula that precludes individual selection; formula can be based on factors such as age, years of service, compensation or position.
- The plan generally may not provide a permanent benefit to employees (there may be an exception to this if certain IRS requirements are met).
- Coverage must be provided to a group of at least 10 full-time employees (unless certain conditions set by the IRS are satisfied).
For more details on these requirements, visit the IRS website here.
Be sure to articulate plan rules to employees. For instance, some plans require medical underwriting if the employee elects coverage above a certain amount, or elects after the initial eligible enrollment period.
In addition, remind employees regularly to update their beneficiary and other personal information as needed. This is especially important for employer-sponsored coverage that is easily elected each year; employees may forget to check their information because the election is so low maintenance.
Many employees do not appreciate the importance or value of life insurance. It is vital that you educate your employees. Doing so can foster improved company loyalty, as employees often appreciate getting financial advice from their employer. Plus, employees with a better understanding of life insurance are more likely to enroll in your program and better realize and appreciate the value of your benefits package.
Life insurance is one of the most common employer-provided benefits. This article covers the basics you should know, from types of coverage to promoting it to your employees.
Benefits for Employees
Though life insurance is an important asset for future financial security, many employees don’t realize its importance. Teaching employees about the value of life insurance may increase loyalty to the company as they better appreciate this benefit. Ask employees to envision the debt and financial responsibilities that loved ones would face in the event of their death. If the employee is the primary household income, how will the family support themselves? If the employee dies and leaves behind a mortgage or substantial medical bills, who will have the burden of paying that debt? Many employees do not realize the financial benefits of a life insurance policy until they think through these issues. If you offer a permanent coverage option, also explain the value of having the cash benefit component to the policy.
Emphasize to employees that buying life insurance on their own is costly; even if your group coverage is employee-paid, you are still offering significant advantages:
- Lower rates through a group policy than if buying individual coverage
- Generally no medical review is required for group policies, as opposed to individual policies where an unfavorable medical exam could disqualify the individual or trigger extremely high premiums. (Be sure to inform employees on restrictions regarding this issue, such as a requirement to enroll when first eligible to avoid a medical exam.)
- Convenience of payroll deductions for premiums
Educating employees on the benefits of life insurance in general and the advantages of purchasing through your group plan can help increase awareness and participation, boost loyalty, and support hiring and retention initiatives.
Factors to Consider
When deciding to offer life insurance as an employee benefit, there are a number of factors to consider:
- What type of coverage will you offer?
- Will you offer term insurance, permanent or both?
- Who will be covered (employees only, retirees, spouses, dependents)? Note: Only employees can be covered under a group-term policy.
- When is coverage effective? Will there be a waiting period?
- What amount of insurance will be available? How will that amount be determined (flat fee vs. multiple of salary)?
- Who will pay premiums (you, employees or both)?
- Will there be a minimum amount employees are required to elect? What is the maximum coverage amount allowed?
Once you have an idea about the type of coverage you’d like to offer, Sentinel Benefits & Financial Group can help you find a plan that meets your needs.